FRL3000 chapter 12

During the financial crisis of 2008, the S&P 500 Index fell by _____ percent.

37

Mona Corporation has a variance of returns of 343, while Scott Corporation has a variance of returns of 898. Which company's actual returns vary more from their mean return?

Scott Corporation Reason: The variance of return measures the squared difference in the returns from their mean.

ratio is calculated as the risk premium of the asset divided by the standard deviation.

Sharpe

Arrange the following investments from highest to lowest return based on what our study of capital market history has revealed about risk premiums.

Small company common stock long term corporate bonds us treasury bills

Which of the following is commonly used to measure inflation?

The Consumer Price Index (CPI)

The Ibbotson-Sinquefield data

U.S. T-bills had the lowest risk or variability long-term corporate bonds had less risk or variability than stocks

Arrange the following investments in ascending order from lowest historical risk premium at the top to highest historical risk premium at the bottom. Instructions Treasury Bills Small-company stocks Large-company stocks Long-term corporate bonds

U.S. Treasury Bills Long-term corporate bonds Large-company stocks Small-company stocks

More volatility in returns produces ______ difference between the arithmetic and geometric averages.

a larger

The second lesson from studying capital market history is that risk is _____.

handsomely rewarded

Dividends are the ______ component of the total return from investing in a stock.

income

The CPI is the most commonly used measure of

inflation

The year 2008 was _____.

one of the worst years for stock market investors in US history

Variance is measured in ___, while standard deviation is measured in ___.

percent squared; percent

Normally, the excess rate of return on risky assets is ___.

positive

The arithmetic average rate of return measures the ____.

return in an average year over a given period

The Sharpe ratio measures ___.

reward to risk

The Ibbotson-Sinquefield data show that over the long-term, ___.

small-company stocks had the highest risk level T-bills, which had the lowest risk, generated the lowest return small-company stocks generated the highest average return

A distribution tends to have a smooth shape when the number of observations is ___.

very large

The dividend _________ is defined as the annual dividend amount divided by the beginning stock price.

yield

A normal distribution has a ______ shape.

symetrical

A projected IRR on a risky investment in the _____ percent range is not unusual.

10 to 20

In general, the arithmetic average return is probably too _____ (low/high) for longer periods and the geometric average is probably too _____ (low/high) for shorter periods.

High; low

The dividend yield for a 1-year period is equal to the annual dividend amount divided by the ______.

beginning stock price

If you are forecasting a few decades in the future (as you might do for retirement planning) you should calculate the expected return using:

blume's formula

The ________ gains yield can be found by taking the difference between the ending stock price and the initial stock price and dividing it by the initial stock price.

capital

If you buy a stock for $10 and later sell it for $16, you will have a ____.

capital gain of $6

The two potential ways to make money as a stockholder are through ______ and capital appreciation.

dividends

The (greater/lower) the risk, the greater the required return.

greater

The capital gains yield can be found by finding the difference between the ending stock price and the initial stock price and dividing it by the ______.

initial stock price

Greater return volatility produces a (smaller/larger) difference between the arithmetic and geometric averages.

larger

Geometric averages are ______ arithmetic averages.

smaller than

A capital gain on a stock results from an increase in ______.

stock price

Studying market history can reward us by demonstrating that _____.

the greater the potential reward is, the greater the risk on average, investors will earn a reward for bearing risk

Average returns can be calculated _____.

two different ways: arithmetic & geometric

When a company declares a dividend, shareholders generally receive ______.

cash

The second lesson from capital market history is that there is a direct link between _____ and reward.

risk

Which of the following are ways to make money by investing in stocks? (Select all that apply.)

Capital gains Dividends

Average returns can be calculated using _______ or arithmetic average.

geometric

The standard deviation is the ______ of the variance.

square root

Which of the following are true?

Common stocks may experience negative returns. T-bills sometimes outperform common stocks.